Before calculating their final pay
Gathering all the information
The first step is gathering all the relevant information required for accurate final pay calculations. All employees are entitled to certain components in their final pay. These components include:
Their normal rate for the notice period
Accrued annual leave that hasn’t been taken yet
Any other additional payments specified in their employment contract
It’s important that every employee is treated equally when they leave your company, regardless of the reason. You cannot withhold any payments owed to them, even if they’ve been dismissed for gross misconduct. Failure to do so may result in potential legal consequences and claims against your company.
Below are a list of the payment elements you’ll need to check when gathering all the necessary information for your employee’s final pay:
Their employment contract: This will help you confirm important details like their basic pay, entitlements, notice period and any additional payments outlined in their employment agreement. If the employee is paid on an hourly basis, gather their timesheets to determine the exact amount owed based on the hours they worked
The holiday allowance: Employees are entitled to 5.6 weeks per year for a full-time role. If they leave part-way through the year, you’ll need to calculate the pro-rated equivalent of this amount. You can learn more about holiday entitlement in our guide
Any company asset or property they’ve been provided with at the start of their employment: This can include a work laptop, a company car, etc. Some companies allow employees to buy their laptop at a reduced price and deduct it from their final pay
Ongoing recurring deductions: This could include a cycle-to-work reimbursement scheme or season ticket. Any remaining balance from these schemes will need to be deducted from the employee’s final pay
Any final reimbursements for expenses due: If an employee has any outstanding expenses when they leave, you’ll need to either add those to their final pay, or pay them back separately
Calculating the employee’s final pay
The way you calculate an employee’s final pay will depend on whether they’re salaried or paid on an hourly basis.
Final pay for salaried employees
For employees on a salary, the final pay calculation involves a few steps:
Agree with your employee what their final day will be. You’ll need to pay them for their entire notice period, even if they don’t work it
Based on that final employment date, you’ll need to calculate their final salary and any additional notice period pay. To do this, you’ll need to learn how to calculate a pro-rata salary
Now calculate their holiday accrual using this formula: Number of annual leave days in a year / 12 months = 1 month’s worth of holiday accrual. This amount can be a bonus or deduction, depending on how much time off they’ve taken up to their final day of employment
Add any additional pay or deductions mentioned above to the final pay
You now need to figure out how much tax is applied to the employee’s final pay. Depending on how you run payroll, you can get these figures through your payroll software or your accountant. Unless your employee is leaving through a redundancy process, any additional pay added to their final pay is taxed like regular income (including holiday pay)
Final pay for hourly-rate employees
Calculating the final pay for employees paid on an hourly basis is relatively straightforward. Multiply the employee's hourly wage by the number of hours worked since the last pay period to determine the final pay owed:
Agree with your employee what their final day will be. You’ll need to pay their entire notice period even if they don’t work it
As with a salaried employee, you’ll need to calculate their holiday accrual - but you’ll need to use a slightly different formula: (Hours worked / full-time annual work hours) x full-time annual holiday entitlement. This amount can also be a bonus or deduction, depending on how much time-off they’ve taken up to their final day of employment
Add any additional pay or deductions mentioned above to the final pay
You now need to figure out how much tax is applied to the employee’s final pay. Depending on how you run payroll, you can get these figures through your payroll software or your accountant. Unless your employee is leaving through a redundancy process, any additional pay added to their final pay is taxed like regular income (including holiday pay)
💡 Tide Payroll automatically determines how much holiday pay is owed to leavers, removing the need for manual calculations and reducing the risk of potential error.
Additional factors that may affect final pay
As well as the basic pay calculations, there are other factors that may come into play when calculating your employee's final pay - like redundancy payments, sick pay, family leave entitlements, expenses, and more.
Redundancy payment
If you’re making an employee redundant, they may be entitled to redundancy pay. The specific amount of redundancy pay varies based on the employee's age, length of service, and the capped rate set by the government for a given year.
If you’re running a redundancy process, we’d recommend checking ACAS’ guide for employers or getting specialised advice on how to run a compliant redundancy process.
Sick pay
It’s worth noting that if an employee is absent due to sickness during their notice period, they are generally entitled to receive full pay for the duration of their notice period.
Even if the employee is only eligible for Statutory Sick Pay (SSP), you must provide full pay during the notice period.
Family leave
Employees on maternity, paternity or shared parental leave are entitled to receive their normal rate of pay during their notice period.
For example, if an employee on maternity leave resigns or is made redundant after the 15th week before their baby is due, you must continue paying Statutory Maternity Pay (SMP) for the full 39 weeks.
Tax considerations
An employee’s final pay is subject to the same tax and National Insurance (NI) deductions as regular pay, with a few exceptions. This means you’ll need to deduct the right amounts for income tax and NI contributions from the employee's final pay.
Certain payments - such as statutory and enhanced redundancy payments and compensation for loss of employment - benefit from a tax-free £30,000 cap. If you’re in the situation where you have an employee benefitting from a tax-free amount, we’d recommend working out their employment taxes with your accountant or through your payroll software.
Once you’re happy with your calculations and tax liabilities, it’s time to run your payroll process and submit figures to HMRC as you normally do.
After calculating the final pay
Once you’ve submitted payroll for the month, you’ll need to send your employee their final pay, payslip and P45:
A P45 is a document that contains useful information like their tax code, as well as their National Insurance number and any student loans they may still be paying off. HMRC gives more details on how to provide a P45
Their final payslip should detail their pay, notice period, any holiday accrual bonus or deductions, and any additional payments or deductions that are due too
You’ll also need to take some other steps when offboarding an employee, including:
Notifying your pension provider that they’re leaving
Organising a courier to recoup their work laptop, if they’re not buying it from you
Removing their access to the company’s communication tools (eg Slack, Google suite, etc)
Carrying out an exit interview with the employee - this can be a great way to gather feedback on your company
Wrapping up
Calculating final pay can feel overwhelming, especially when you're already swamped with other offboarding tasks and your everyday workload. But getting it right is crucial for both you and the employee.
The good news? You don't have to tackle this alone. A smart payroll solution like Tide Payroll can automatically calculate all final pay details for you. That includes their final pay, notice pay, holiday accrual pay and any other deductions due.
Image from Unsplash published by huntersrace
